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It's a miracle of science that the talking heads of the financial press who have been predicting China's demise for the past 10 years are getting invited back to predict more of the same. Whatever they forecast, we can fairly safely assess that we know the outcome...they will be wrong about it again.

Aside from China's oversupply issues and shadow lending system and its housing bubble, China is the world's second most important economy, bar none. It is at least as important as the United States to Brazil; it is more important than the United States in all of southeast Asia. It is more important than the United States in Russia. Argentina has Chinese banks; almost as much as American ones. The housing bubble is a generational phenomenon as much as it is an economic one. Millions are leaving poorer rural areas and moving to cities. Also, due to the fact that many Chinese are more accustomed to buying houses for stores of value than they are buying IRAs and putting money into stock funds, real estate is always in demand and will be until China develops a serious, trustworthy product line of investment funds. That's a whole new world for China, and a massive opportunity for wealth management firms.

Meanwhile, the China hard landing is not upon us.

The Chinese yuan has yet to crack 7 to 1 as George Soros and Barclays both predicted.

China's economy in the first half showed better than expected growth, at nearly 7% versus forecasts of 6%. Incomes are rising as is consumer spending, and corporate earnings at new industry juggernauts like Baidu surprised to the upside.

"The Chinese economy delivered many surprises in the first half of the year, disappointing -- yet again -- the pundits who predicted a hard landing," says Andy Rothman, a Matthews Asia investment strategist and an old China hand who has lived and worked there for 20 years.

It's a miracle of science that the talking heads of the financial press who have been predicting China's demise for the past 10 years are getting invited back to predict more of the same. Whatever they forecast, we can fairly safely assess that we know the outcome...they will be wrong about it again.

Yea, US is old hat at quashing predictions like those, though again, even a broken clock is right twice a day. Expect them to say I told you so next pullback, even if that's 10 years from now.

The table shows how East Asia manufacturing destined for the US market shifted from predominately Japanese origin to predominately Chinese. Relocating facilities outside the US from one trade jurisdiction to another has only one direct impact on the US economy: the change in prices charged for those imports.

In other words, there is no harm suffered by US producers when a Taiwanese factory moves to China. There is, however, a significant and lasting increase in US standards of living when products previously produced by workers earning Japanese wages are later produced by workers earning Chinese wages.

Given that workers are not compelled to labor in a Korean or Hong Kong-owned factory as compared to working in a Chinese-owned one, the logical assumption is that they choose to do so because of better wages, working conditions or other reasons. Hence, the less well-off Chinese worker benefits along side the less well-off US consumer.

Two interesting articles

An Empirical Analysis of China’s Dualistic Economic Development: 1965-2009, by Marco G. Ercolani, Birmingham Business School Department of Economics, University of Birmingham; and Zheng Wei, Nottingham University Business School, University of Nottingham, Asian Economic Papers 10: 3 (2011). (http://www.mitpressjournals.org/doi/...ref+nowrap+pdf)

The authors argue that, while important, China’s economic reforms are facilitators rather than causes of economic transition. The country’s remarkable and sustained growth owes more to “the development of a dualistic economy with surplus labor.”

Given that the labor surplus was a long-standing feature of the economy prior to 1978, one has to wonder about the timing of the take-off. Was the timing of the reallocation of surplus labor toward more productive activities the cause of rapid growth, or a consequence of it?

The slow-and-steady school of thought believes that the deliberate pace of reform provided sturdy foundations upon which a more lasting transformation would later take place. The contending, boom-bust-and-readjust perspective suggests that China followed the standard East Asian capitalist model, and milked the agricultural sector for urban advantages.
When Fast Growing Economies Slow Down: International Evidence and Implications for China, by Barry Eichengreen, UC Berkeley Department of Economics; Park Donghyun, ADB Economics and Research Department; and Shin Kwanho, Korea University Department of Economics, Asian Economic Papers 11:1 (2012) (http://www.mitpressjournals.org/doi/...ref+nowrap+pdf)

There is a speed bump in the road to developed nation status just around that sharp learning curve up ahead. Growth down shifts by two percentage points a year after per capita incomes reach US$17,000 in constant 2005 “international prices” (PPP). This didn’t happen prior to World War II because governments didn’t have an “ideology of growth:” a policy preference for high rates of expansion. Since then, reallocating resources and favoring the successful have paid dividends, particularly in East Asia. But, once the pool of under-utilized agricultural labor is drained, growth slows down, significantly.

Except for Hong Kong and Singapore, where the slow-down occurs at much higher income levels. The authors conclude that it is because these societies are so open, rather than because they are so small, that they continue growing rapidly for longer.

Two problems that I see. First, incomes in both Hong Kong and Singapore are very poorly represented by GDP per capita. Too much of the economy is in trade to make that a useful proxy, so better to use private consumption per capita. Second, the authors make quite a bit of noise about undervalued exchange rates, but never get around to noticing that the impossibility of exchange rates being misaligned for very long periods of time … isn’t a problem.

Two reads on China's economy

The paper is an application of a four-part framework: external, internal, environmental and distributional trends and developments. The authors claim China has achieved “substantial progress” in areas such as balancing the current-account, reducing dependence on external markets, rationalizing the industrial and service sectors, and curbing air pollution. Shortfalls include income inequality, credit market modernization, energy efficiency and revising the balance between investment and consumption.

One interesting point that never gets much attention is the poverty rate. From 765 million in 1980 – over 75% of the total population – poverty has dropped to 27 million (1.9%), a reduction of 96.5% over 37 years.

A useful companion piece is China’s Local Government Bond Market, by W. Raphael Lam and Jingsen Wang (IMF Working Paper WP/18/219, September 2018). The paper puts China’s debt problem into perspective: local governments account for Rmb16.5 trillion (55.2%) of the total Rmb 29.9 trillion outstanding (equal to 37.7% of GDP).

China’s economy is slowing, this much we know. But, how much more can we infer from the evidence and does it really matter?

The headline numbers are much the same as in recent years: 6.6% real growth, Rmb90 trillion total GDP (about $13.6 trillion, or two-thirds the size of the US) and 2.1% inflation. If the numbers are accurate (this is not a given), then there’s nothing really out of the ordinary.

In US dollar terms, the economy is $1.1 trillion larger than a year ago, which is about $133 billion more than the increase in the US economy expected by the bipartisan Congressional Budget Office. In other words, China contributed more to the global economy in 2018 than did the United States.

The official data say the economy in 2018 grew at its slowest pace since 1999. If previous years’ data are not quickly and substantially modified, that means the economy grew just under 40% in real terms over the past five years. For a bit of perspective, the US economy added less than 10% during that same period.

Politicians are elected to serve...far too many don't see it that way - Albany Rifles! || Loyalty to country always. Loyalty to government, when it deserves it - Mark Twain! || I am a far left millennial!

Book review: The Future of China’s Bond Market

This is an extremely detailed and highly valuable technical analysis of the current state of China’s bond market, and what needs to be done to make it better. It is, however, the authorized perspective: very few of the contributors are independent private sector economists. As such, it shouldn’t be any surprise that President Xi Jinping gets a nod in the second paragraph.

Anyone considering investing in China – whether directly or on a portfolio basis – should read at least the first chapter. It provides a very useful overview of the market, and a fairly frank assessment of the risks of things like trusting credit rating agencies. The glossary at the back is excellent, and it is available on-line for free.

The key conclusions are these:

The future’s so bright we gotta wear shades.

Implicit guarantees and corporate governance are real and serious problems.

Liquidity is inadequate, and there is a major risk of abrupt deleveraging.

There is ample room for further integrating the Chinese and global bond markets.

A more flexible exchange rate regime would be very useful, as would credible inflation targeting.

The authorities shouldn’t be afraid of an influx of foreign capital.

The PBoC is slowly moving away from using reserve requirements and benchmark interest rates as key monetary policy tools, but only slowly.

It’s still very early: bond financing accounts for just 10% of nonfinancial corporate finsncing, compared to 60% in developed economies.

The local government bond market is a mess, and it won’t get much better any time soon.

Hedging tools such as the Treasury futures market still require physical settlement, and are hampered by a lack of international capital.

Keep an eye on the Green Bond market, where China is well ahead of the game. Not so much so in the area of Asset-backed Securities.

The market needs more foreign participants, better liquidity and hedging tools. A custodial system would be nice, too, as would greater clarity on accounting and taxation.

China is soon going to overtake the US as the world's largest and leading economy. And the fact that China and Russia are aligning as a military power to be reckoned with, is going to cause the hawks to sit back in their rockers and stop imagining their hopes of a military solution for the US.

MAD has saved the world for 75 years and it's more likely than not that it's going to save us for the next 75. Although it's going to be a bumpy ride!

There can't be any doubt that Trump's handlers recognize the urgency in the current situation. And the undeniable fact that the US's trade war isn't working out well for them.

Explain to me how 25 recessed Chinese ICBMs (that means the warheads are not mounted to the rocket) can survive an American first strike and how can they assured American destruction when they're nothing more than a black spot on the ground.

Dickhead. You know squat all about the Chinese nuclear arsenal nor their doctrines.

Also, there is no Sino-Russian alliance. Putin doesn't trust Xi and vice versa. Neither has reduced their forces along their common border. In fact, Putin has put new generations of cruise missiles in the Far Eastern Theatre and they're not aiming at Japan.

As for the trade war, I don't see Trump offerring bank reforms, foreign investment protection, respecting intellectual property rights, manufacturing rights, everything that Xi is offerring to Trump. To the degree that satisfy the Americans remain to be seen but there is absolutely zero doubt that it is up to the Chinese to satisfy American demands and not vice versa.